In a crucial development, Pakistan has been given 40 days to finalise several key actions, primarily requiring parliamentary approvals, to secure a formal staff-level agreement (SLA) with the International Monetary Fund (IMF) for its next bailout programme. This comes as a two-week dialogue between Pakistani officials and an IMF mission, led by Nathan Porter, draws to a close.
Sources reveal that comprehensive discussions have taken place covering critical economic sectors, including significant reforms in power and gas sectors, state-owned enterprises, pensions, revenue generation, and monetary policy aligned with inflation expectations. The two parties have broadly agreed on action points, timelines, and contingency plans that the government must implement through legislative approval in the Finance Bill 2024-25.
“The IMF seeks parliamentary endorsement for the reforms and policy measures due to the unpredictable political climate,” an official stated, noting that the IMF mission would depart on Friday without announcing an SLA.
While customary goodwill receptions have taken place, the formal announcement of the SLA will hinge on the implementation of gas and electricity tariff adjustments, commencement of reform actions, and approval of taxation and trade tariff-related policy measures. These measures and amendments in tax laws are set to be incorporated in the Finance Bill 2024-25, with the IMF mission reviewing them post-implementation. Assuming satisfactory compliance, the SLA is expected to be formally announced by the end of June or early July 2024.
“Online consultations will likely suffice for minor clarifications after the budget is approved by the parliament, eliminating the need for a follow-up mission,” an official noted.
The federal budget presentation is anticipated for June 7, just before the Eid-ul-Azha holidays, leaving a tight schedule for parliamentary debate.
Key tax-related measures
Officials have indicated that the upcoming Finance Bill will include significant tax-related changes. These include a reduction in tax slabs for salaried individuals, the treatment of agricultural income as standard income, penalties for non-filers, and increased transaction costs for them. Additionally, the removal of the Rs60 per litre cap on the petroleum development levy and the introduction of a carbon tax will be included to enhance revenue and provide leverage for price adjustments.
An agreement has been reached to revise natural gas prices upwards for domestic use, fertilisers, CNG, and the cement sector, with no changes for special commercial uses like tandoors, and some downward adjustments for the power sector. These changes will begin with the new fiscal year.
Addressing gas sector circular debt
Detailed discussions on reducing gas sector circular debt have taken place, focussing on the weighted average cost of gas (WACOG) — a blend of local gas and imported LNG. Contingency plans are also in place if the WACOG reform faces setbacks.
Power sector and debt repayment
The power division has presented multiple plans to the IMF, supported by the World Bank, to manage rising capacity payments and debt repayments for CPEC-related projects. The goal is to ensure full cost recovery through tariffs and to stimulate demand. All relevant data, including the financial impact on state-owned enterprises (SOEs), has been agreed upon.
“Three sets of backup plans for recoveries, reforms, and tariff rationalisation in gas and electricity have been shared and agreed upon, adaptable to changing ground realities,” an official said. Gas prices are expected to increase by 20-30 per cent with the new fiscal year, contingent on WACOG progress.
State-owned enterprises
A list of 24 SOEs has been provided to the IMF, categorised as strategic, essential, or to be transferred to the private sector. The Pakistani government has agreed to retain only those functions that cannot be performed by the private sector. New SOEs, including subsidiaries of Pakistan Railways and the Science and Technology sector, have been identified. While significant progress in privatisation is unlikely in the next fiscal year, transactions involving Pakistan International Airlines may proceed.
Discussions will continue regarding the future of entities like Pakistan Television and Radio Pakistan, with an emphasis on complying with corporate transparency standards.